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This Bubble Could Have Been Burst Before It Inflated

Stamp duties, negative gearing and capital gains tax concessions were all targeted for reform in the Henry Tax Review.

17/03/2017 6:10 AM AEDT | Updated 17/03/2017 6:12 AM AEDT

History records that almost a decade ago, Australia entered the 2007 Federal Election with a bipartisan consensus on the two issues now dominating the economic, political and electoral landscape: climate policy and housing affordability policy.

While it's well known that Howard and Rudd promised a price on carbon in 2007, it's less well known that they also had a consensus of sorts on housing affordability.

In August 2007, Rudd promised to spend $600 million over 5 years to create 50,000 new low-rental homes. Howard praised the intent of the policy. Even the IPA endorsed the policy when it was announced in full before the election.

Fast forward 10 years and four prime ministers and we're no closer to a price on carbon, and we're still getting our heads around the crisis in housing affordability.

Thanks to the looming energy crisis, Australia's political class are finally facing up to the consequences of a lost decade on climate policy. But as with electricity, it is households (and would-be householders in particular) who end up bearing the cost of another crucial policy own-goal -- years of indecision and inaction on housing affordability.

What should rankle all Australians is that much of this vulnerability and heartache could have been avoided -- or at least minimised -- through policy changes that have been on the table for years.

Ironically, the recent episode of rapid house price growth in Australia has its roots in the bursting US real estate bubble that tipped the global financial system into meltdown in 2008.

On the back of RBA rate cuts, fiscal stimulus and direct support from the first-home owners grant boost, nationwide our house prices emerged from the GFC period stronger than they started. And after a brief blip as policy support was withdrawn, they have been surging ahead in most capital cities ever since.

In large part this reflected a conscious policy choice. Faced with sluggish growth, cautious consumers and a looming mining investment cliff, the RBA did the only thing it could from late 2011 onwards: go for broke on households and construction.

The resulting growth pattern is alarmingly similar to America's in the early 2000s: extremely low interest rates, middling jobs growth, and rapid rises in residential investment, house prices and household indebtedness.

The details are different in Australia, but the upshot is the same: fear that a bursting house price bubble triggers an economic and financial shock that makes our recent period of subdued growth look like a walk in the park. Indeed, that's precisely what the IMF, OECD and others have been warning.

Meanwhile, for aspiring home owners, the experience of a jam-packed auction (or 20) hardly allays concerns that things are getting out of hand. The Saturday morning ritual of inspection, auction and despair is like a recurring bad dream. And this is to say nothing of the nightmare facing many unemployed and underemployed Australians who can't afford or access a roof over their heads at all, thanks in part to inadequate social housing and homelessness policy. A growing number of these vulnerable Australians aren't helped by a misplaced faith in market-based reforms to social housing and inadequate investment in new and upgraded stock.

What should rankle all Australians is that much of this vulnerability and heartache could have been avoided -- or at least minimised -- through policy changes that have been on the table for years.

The Henry Tax Review, unveiled by the Rudd government in 2010, provided a template. Stamp duties, negative gearing and capital gains tax concessions were all targeted for reform. The review argued that these current policies result in a housing market that is less affordable, less stable and less fair. The review said that reining in deductions for investors and replacing transaction-based fees with a broad-based land tax could greatly reduce distortions, offer a more sustainable revenue base, and contribute to housing affordability.

Short-termism has triumphed. We've seen a mish-mash of delays, diversions and, more recently, piecemeal suggestions to alleviate some of the pain.

These reforms, with appropriate transitional arrangements and more targeted forms of housing assistance for those who need it, could and should have started a long time ago. They wouldn't have solved all of our housing problems, but they could have provided some support to the first-home buyers who, as things stand, struggle mightily to save enough money to cover deposits and stamp duties, only to be competing with investors who have the deck stacked in their favour.

Short-termism has triumphed. We've seen a mish-mash of delays, diversions and, more recently, piecemeal suggestions to alleviate some of the pain. Many of the latter are well-intentioned but self-defeating. Letting first-home buyers dip into Super or waiving stamp duty for some buyers, for instance, would ultimately result in more money chasing the same properties, with predictable results: even higher prices and even more debt.

Last Friday's announcement that the Government is considering a housing bond scheme is one interesting departure. And, of course, the ALP almost delivered a policy and political win for the ages in 2016 by advocating sensible reforms to negative gearing and came within a whisker of an against-the-odds election win. Why the Government didn't support the negative gearing reforms -- on fiscal, as much as equity, grounds -- still escapes reasonable explanation.

These are promising signs but they come after a decade of disappointment. Our leaders have allowed economic growth to be propped up by record low interest rates and robust migration. But they've failed to make the adjustments and investments needed to safeguard long-term prosperity -- on infrastructure, housing, city planning, tax, energy. This compounds the damage done when distorted incentives draw investors' money towards property and away from investments in the industries, innovations and activity that must drive Australia's economic prosperity in the longer term.

As Ken Henry told CEDA on 23 February, Australia's population growth, which is central to our prosperity, requires a new city the size of Sydney or Melbourne every decade, or a new city the size of Newcastle or Canberra every year. Current policy assumes existing cities like Sydney and Melbourne can continue to expand, even though they already 'stand out in global assessments of housing affordability and traffic congestion'. Henry continued:

'At the very least, we are going to have to find radical new approaches for infrastructure planning, funding and construction. And that includes energy infrastructure, critical to our economic performance and our quality of life. The biggest challenge confronting the energy sector is that climate change policy in Australia is a shambles.'

These twin policy challenges are trapped between a rock (let's call it coal) and 65 Martin Place, where the RBA's efforts to support the non-resources economy are being hamstrung by an out-of-control property market.

In this climate, policymakers aren't close to taking the long view, and adopting brave approaches to grow Australia for the long term. Their first move is to count the political cost of more ambitious changes, or wait for a Tweet from Elon Musk.

But if Turnbull and Shorten can find a way to put the national interest first on climate and housing policy, Australia could douse its burning platform and start to reclaim a lost decade.


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